Page 161 - Aamir Rehman - Dubai & Co Global Strategies for Doing Business in the Gulf States-McGraw-Hill (2007)

A Piece of the Action: Strategies for Entering the GCC Market 145

multinationals’ control of daily business operations. The local
distributor generally decides where the product is stocked and, in the
case of service businesses, who serves which client. Multinationals
have, of course, developed control systems that help mitigate this
risk: they have clauses in their agreements about quality control,
marketing, branding, and other core processes that have the poten-
tial to put their global franchise at risk. Some firms can go further
and align on business practice guidelines and operating proce-
dures. As important and helpful as these measures are, long-
distance control mechanisms are not the same as running a business
oneself. Even when the local distributor does everything by the
book and fully complies with global standards and guidelines, the
multinational has no way of knowing if the business could be doing
better if managed directly. 16 Distribution agreements are a good
way to minimize one’s direct operating risk, but the downsides of
relying on a partner are not insignificant.
Afinal, subtle drawback of distribution relationships is that they
can lead to conflicts of interest. Major local conglomerates will often
act as distributors or franchisees for multiple firms in the same sec-
tor—firms that may even be in fierce competition with one another
globally. I once advised a multinational client who had business inter-
ests in Saudi Arabia; its local agent (a highly prominent family enter-
prise) was also the agent of several key competitors. By representing
several leading multinationals in the same industry, the distributor
had built deep relationships with all key local shops that carried
goods in its category. The distributor also could exercise significant
market power in collecting receivables, managing cash flow, and even
in lobbying for favorable regulations. The challenge, though, was to
get the distributor to promote my client’s products more vigorously
17
than it promoted the competing products. Though different in many
ways, the situation is not unlike selling a home through a real estate
broker in the United States: you may have wished that she was repre-
senting only your home, but in fact she represents many and may
show them all to the same potential buyers and your challenge is to
make your house stand out. Once you have many properties to sell or
are more serious about controlling the process, you will seek an agent
who is exclusively yours, or you will simply sell the home yourself.
Shallow-engagement market-entry strategies are often the best
choice when firms wish to test a new region and at the same time